The Incredible Disappearing Health Benefits

Can a coal company get away with breaking promises to workers?

February 19, 2013

Eddie Bullock spent 27 years in the southern Illinois coal mines working for Peabody Energy, the largest coal-mining company in the world (infamously memorialized by John Prine.) He retired in 1998, when his mine shut down. He’s now 72 years old and suffers from black lung disease; his wife has emphysema, and both have oxygen tanks at their side at all times. But they’re fortunate in one regard: Bullock has a good pension and solid health benefits that were negotiated for him at Peabody by the United Mine Workers of America.

Or he did, at least. In 2007, Peabody created a new entity called Patriot Coal, and transferred to it 13 percent of its coal reserves. It also transferred to it about 40 percent of its health care liabilities—the obligations for 8,400 former Peabody employees. A year later, Patriot Coal was loaded up with even more liabilities when it acquired Magnum Coal, an offshoot of the country’s second-largest mining company, Arch Coal. This left Patriot with responsibility for another 2,300 retirees, and, by last year, total liabilities of $1.37 billion. Patriot Coal is now seeking Chapter 11 bankruptcy, through which it will seek to limit or discharge its pension and health obligations to 22,000 retired miners and their spouses, 90 percent of whom never worked for Patriot Coal—among them Eddie Bullock, who, oxygen tank and all, joined the UMWA’s outspoken president, Cecil Roberts, and a handful of other former Peabody miners in getting arrested at the first of two recent rallies at Peabody’s St. Louis headquarters.

“They’re gonna take our insurance away from us,” Bullock said to me over the phone. Peabody “promised us our insurance and everything and formed another company and put all our stuff in that, and let it go bankrupt. I never worked for Patriot in my life. I worked for Peabody.”

There was much talk during the 2012 campaign about corporations breaking faith with workers, courtesy of Team Obama’s highly effective attacks on Mitt Romney’s record at Bain Capital. President Obama’s subsequent victory over Romney was taken by some as a repudiation of the vulture-capitalist vision for America. But the Patriot Coal case now playing out in bankruptcy court in St. Louis and in Charleston, W.V., where the UMWA has brought suit against Peabody and Arch, is a blunt reminder that the election in fact settled nothing: questions of basic fairness in American economic life remain as contested as ever. If anything, the matter of Patriot Coal suggests the stakes have gotten only larger. Veteran observers of employer-labor relations say that Peabody’s Patriot Coal gambit—carving out an entirely new company that seemed designed to fail in order to offload retiree obligations—is as brazen as anything they’ve ever seen.

“It’s rather extraordinary,” said Robert Bruno, director of the University of Illinois-Chicago’s School of Employer-Labor Relations. “It’s just a more elaborate attempt to detach the employer from any kind of legacy obligations for their employees, a further abdication, or departure, from the post-war era’s contract in which employers bore some responsibility…Now that model of providing some level of social insurance has been torn asunder, and the burdens have been handed to the individual worker.”

The Patriot Coal bankruptcy has even become the subject of a paper by Temple University business professor Bruce Rader, who argues that Peabody and Arch’s maneuver is questionable even from the standpoint of a strong believer in free markets. The maneuver, he writes:

ultimately will shift the burden to the general public or in a word socialize the health care benefits since the miner’s ability to pay will not cover this obligation and then the health care burden will be shifted to the government. In essence we will all pay the costs. This is a perfect example of the use of the legal system to socialize the costs and therefore lead to a transfer of costs to the general public from the shareholders of a company.

The question becomes, as a society, do we want to condone this? Should the profitability of these companies be enhanced at the general public’s expense, and what effect will this have on our system of allocating capital? Free-market capitalism is ultimately a system for the allocation of capital in a society and the efficient allocation of capital is the driving force behind the economic growth that this country has experienced. For this system to work, the participants must suffer the consequences and reap the benefits of their actions.

Rader goes on to note that Peabody and Arch’s attempt to offload retiree obligations via Patriot comes at the expense of competitors who have been paying into the multiemployer pension plans that will have to pick up more of the cost of the “Patriot” workers. “These competing companies, such as the Drummond Company or CONSOL, might be forced to create similar immoral schemes in order to remain competitive players. Morally and economically this transfer is not in the best interest of anyone but the companies (Peabody and Arch).” He concludes:

The role of government in a capitalist system is to level the playing field. This means that the costs of production are allocated to that production. Then the competitive system leads to investment in the most efficient alternative. If the government or the legal system allows a questionable transfer like the one we’ve seen at Patriot Coal, followed by a bankruptcy filing purposely designed to harm workers and retirees, it is condoning or encouraging ‘corporate socialism.’ Corporate socialism is a system that privatizes profits and socializes costs. If that is considered capitalism, then Al Capone is right in his statement: ‘Capitalism is the legitimate racket of the ruling class.’"

Peabody, which recently reported $2 billion in 2012 revenue, and whose CEO Gregory Boyce earned $10 million in 2011, responded to my questions about the case with a written statement by senior vice president Vic Svec. In it, Svec described Patriot Coal as having been perfectly viable at the time of its creation—“trade publications cited the dream team of top management, and analysts touted a bright future based on solid prospects and a strong balance sheet.” But, he went on, Patriot had been hurt by its subsequent acquisition of Magnum, the global financial crisis, competition from low-cost shale gas, and EPA regulations. He concluded: “Peabody has lived up to its obligations and continues to do so. The UMWA is fully aware that this is a matter solely between the union and Patriot Coal, and the proper process for deciding such issues is through the bankruptcy court—not the court of public opinion.”

Likewise, an Arch spokeswoman dismissed the notion that that company had any role in the demise of Patriot Coal. She noted that the sale of the Magnum mines to Patriot was done not by Arch, but by another entity that had in 2005 taken over the mines from Arch, ArcLight Capital Partners: “Arch Coal had no involvement whatsoever in either ArcLight Capital’s decision to sell Magnum to Patriot or in Patriot’s decision to purchase Magnum. The transaction with Magnum was executed in good faith, at a time when coal market conditions were very different than they are today.”

Hogwash, says Larry Knisell, 63, who worked 27 years for Peabody as a shuttle-car operator in its West Virginia mines, and was president of the UMWA’s Local 1570 for 13 of them. Knisell, who retired in 1999 and was also among those arrested at the first of the recent St. Louis protests, says he knew something was up at the time of Patriot’s creation in 2007. “All they did was got in the room and picked off the guys in charge. They were the same guys who were in charge of Peabody, but they just said, you guys are now in charge of Patriot. They put them in a different building and said, you’re in charge….And they took all the bad things, in their eyes, and gave them to Patriot. They set Patriot up to fail from the very beginning.” Knisell takes 21 pills per day for, among other things, high blood pressure, Type 2 diabetes and post-traumatic stress disorder from the Vietnam War, but he at least has a backup to his Peabody coverage: he can use the nearest Veterans Administration hospital. But his wife relies on his Peabody coverage to cover treatments for her fibromyalgia. He worries most of all about the men he worked with who are in worse shape than he is and don’t have access to the V.A. “All they wanted was what they had coming to them in the end, and Peabody pulls the rug out from under them. It’s 'we’ve gotten all we’re going to get out of you guys, and you’re no more use to us now than a broken tool.'”

Dr. Michael Schroering sees many of the “Patriot” miners at the clinic he works at in Fairmont, W.V. I asked him whether those who were 65 or older would be spared the pain of losing their coverage since they, at least, would be able to fall back on Medicare. To some extent, he said. But the medications and treatments for many of the miners’ conditions—heart and respiratory troubles, as well as lingering effects of injuries below-ground—were so expensive that their share of the costs would add up even under Medicare, whereas their retiree plans cover almost everything. He noted that there has been a troubling resurgence of black lung disease in miners, and that many who show symptoms of the disease have had trouble qualifying for the federal compensation program set up for victims of it. That they were now having to worry about losing their private coverage, as well, dismayed Schroering.

“These are guys who have put lots of years in mining and have always been told and promised through contracts that if they worked hard now, they could retire with some security and not be worrying whether they’re going to be able to afford the medicine and care they might need,” he said. “Just from an ethical standpoint, I find it disgusting that a corporation would be trying to what Peabody is trying to do by separating out the older miners and putting [them] in a company they knew would fail, just so they could get out from paying.” He added: “For some of these people, the only good thing about their existence has been that they’ve had good health care.”

As the retirees await the fate of their benefits, last week brought them another morsel to chew on: Patriot sought court approval to distribute $6 million in bonuses to 225 corporate executives and salaried employees.